Don’t bank on EU’s tough state aid talk

By Paul Taylor
April 20, 2009

paul-taylor– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

PARIS, April 20 (Reuters) – The European Union’s antitrust czar is struggling to stop governments bending EU rules on state aid to business when they rescue banks with taxpayers’ money.

But Neelie Kroes’ threat to force some banks to the wall unless they offer viable restructuring plans within six months of receiving state cash was economically unwise and politically inept. It could fuel political pressure to suspend the rules and weaken the European Commission’s crucial watchdog powers.

EU regulators in charge of policing state aid have given fast-track approval to more than 50 rescue schemes since last October, when the full force of the financial crisis hit Europe after the collapse of Lehman Brothers in the United States.

Kroes told Reuters in an April 7 interview that time was running out for some banks to propose restructuring plans that in most cases would mean slimming down and selling off assets to avoid distortions in competition.
“Brussels will not rubber-stamp such schemes and may even let banks go bankrupt if those plans do not satisfy the Commission,” the EU Competition Commissioner said.
She is very unlikely to make good on her threat because of the depth of the crisis and fierce political pressure from big member states to go easy on the banks.
Brussels would do better to give banks and governments more time to get over the worst of the crisis before restructuring or repaying aid, rather than making banks divest now at fire-sale prices that would cause bigger losses for taxpayers.

Kroes implicitly acknowledged as much on April 15 when she approved a request from Britain to extend recapitalisation and credit guarantees for its banking sector, approved last October.

A Commission statement said “the circumstances on the financial markets justify the extension which aims at underpinning lending to the UK real economy”.

The EU watchdog has bared its teeth at some other state rescues resulting from the crisis. Kroes has had a tug-of-war with Berlin over the conditions for state rescues of Commerzbank <CBKG.DE>, Germany’s second largest bank, and regional lenders WestLB [WDLG.UL] and BayernLB [BAYLB.UL].

Brussels is demanding Commerzbank spin off mortgage lending in return for an 18 billion euro government bailout. It is also insisting on deadlines for the sale of all or parts of WestLB in return for last year’s rescue and pressing state-aided BayernLB to sell foreign units.

German Finance Minister Peer Steinbrueck has charged that EU foot-dragging is undermining confidence in a systemically critical part of the financial sector.

Kroes may have issued her warning to rebut such pressure and concentrate member states’ minds on the need for an exit strategy from bankrolling banks. Commission figures show EU governments have provided 3 trillion euros in guarantees, risk shields and recapitalisation since the crisis began.

But it makes no sense for the EU executive to force the break-up of banks in the midst of the worst recession since the Great Depression. It would force banks to take further losses by disposing of assets at a time when there was no market for them.

The Commission’s authority over state aid is not comparable with its direct power to veto mergers. It can order governments to recover aid deemed illegal and haul them before the European Court of Justice if they fail to comply, but that process often takes years.

If pressed by Kroes, governments would probably tough it out and hope that by the time the Commission acted, the market would have recovered sufficiently for the banks to repay them — or for the state to sell on shares it has purchased.

Politically, it would be dangerous for Brussels to start down that road against any of the big EU states, especially at a time when Commission President Jose Manuel Barroso is seeking re-appointment this year. French President Nicolas Sarkozy may be the most outspoken in his criticism of EU competition “dogma”, but many other governments have been irritated by the Commission forcing them to change national rescue measures.

Many of the bank rescues were approved under an EU treaty article that allows state aid “to remedy a serious disturbance in the economy of a Member State”. That emergency situation is unlikely to end in the near future.

If Kroes did decide to make an example of a bank, the risk is that member states could reach for the nuclear option and seek to suspend the state aid regulations completely in the financial sector, or use their power to override a Commission decision unanimously. So if the Commission overplays its hand it risks seeing its key economic powers emasculated.
(editing by David Evans)

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